Chapter 5 - Value Chain Analysis

Value Chain Activity drivers

EXECUTIONAL DRIVERS STRUCTURAL DRIVERS

External/ Industry Value Chain Dimensions

Suppliers > Firm > Distribution

What is the difference between internal vs. external analysis?

industry analysis does not explain most of the variations in performance

SWOT analysis

S strengths W weaknesses O opportunities T threats -traditional approach -very common strategic planning exercise -easy to understand and use -helps to identify alignment or misalignment (strengths with emerging opportunities/ weaknesses with emerging threats) -suggestive of overall direction -enables competitive comparison on strength dimensions -strong starting point for internal analysis

VC competitive advantage: opportunity recognition activities

when the company is able to identify an opportunity to provide greater benefits for customers or suppliers, or discover ways to reduce costs and prices sets of activities through which companies may excel in opportunity recognition includes: 1)through internal coordination within the company VC 2)through external relations downstream with customers and upstream with suppliers 3)through other external relations and "boundary-spanning" activities that enhance the company's ability to anticipate emerging trends and industry/competitive dynamics

Explain the differences between internal analysis and external analysis.

*External analysis* examines industry structure and driving forces, in order to assess the attractiveness of an industry and identify key success factors that every company must attend to. External analysis can explain roughly 20% of the variation of performance of firms. *Internal analysis* can be conducted using SWOT analysis or value chain analysis. SWOT tends to present a static snapshot, while value chain tends to present a dynamic view. Internal analysis is intended to identify what a company is particularly adept at doing as well as possible points of weakness. Strengths and weaknesses usually arise because of activities and routines that companies engage in. Value chain analysis helps dig deeper to identify these activities and routines.

Core Idea of Value Chain

- p/s do not define companies -sets of *activities* combined to form a successful business system -products and services are *outcomes* of activities performed by businesses -creating and capturing value is a result of how people act -business is the organization of activities -you can manage how people act

VC competitive advantage: Coordination across the company

-ability to capture value -value capture = company creates value by acting in ways that its competitors cannot or will not act - greatest source of value capture = coordination across elements of a company's value chain -makes company idiosyncratic (unique) and not subject to imitation

Conducting VC analysis: Evaluate value-creation characteristics and costs of activities

-allocate costs to activities using activity-based costing methods -identify combinations of activities that support each other and their costs -identify executional drivers and structural drivers of these activities, for insight on how to drive down costs or increase value added

Potential Value Chain Drawbacks

-depends on information systems to provide useful data -more focus internally, less focus on market

Value Chain Analysis Benefits

-dynamic view - like a movie over time -illustrates origin of strengths/weaknesses -yields better predictions about future developments -spotlights internal synchronization -provides actionable information - focusing on what people actually do; since you are a manager of people you can manage behavior

Competitive advantage and the Value chain

-entire SET of value chain activities -learning new best practices -support activities consistent with strategy -Coordination Across the Company -Opportunity Recognition Activities -connections upstream and downstream *These are -intangible -unobservable by competition*

VC competitive advantage: Value Creation

-providing greater benefits for same price -providing same benefits for lower price -providing greater benefits at incremental price smaller than the gain in benefits -providing broader access to benefits to wider audience without sacrificing the benefits delivered to existing customers

SWOT drawbacks

-results in a laundry list of items -item descriptions can over-simplify, very general, and not actionable -definitions can vary in present/over time (aka strengths can also be weaknesses - not clear how to resolve) ex. size can be a strength, also an inhibitor strong CEO can be great, also a risk new tech can threaten, also be platform for growth -unclear if strengths are relevant to KSF's -static view / at a point in time

Five basic questions to ask yourself during step 3 of value chain analysis (identify improvements that allow the company to capture greater value)

1. Can we increase benefits in this activity (or subset of activity), holding costs constant? 2. Can we hold benefits constant while reducing costs? 3. Could we reduce assets required for this activity, while holding both benefits and costs constant? 4. Would a further investment in assets improve the company's ability to either create benefits or improve costs? 5. Can we expand the scale or scope of our activities to a broader audience without sacrificing benefits or costs to our current sets of stakeholders?

Conducting a Value Chain Analysis

1. Identify key-value chain activities 2. evaluate value-creation characteristics and costs of activities 3. Identify improvements to capture greater value

Drawing a Value Chain

2 types - Industry and Company *Include both primary activities and support activities* • Identify activities in every cell, or are there some cells left blank? If so, why? • Define activities in specific terms; it helps understanding versus staying generic. • Include connections upstream with suppliers & downstream with customers. • Indicate how the company achieves consistency of activities across cells and internal coordination: are the activities inconsistent, independently consistent, mutually-reinforcing?

Explain the benefits and drawbacks of using SWOT analysis.

Benefits: 1) easy to understand and use 2)helpful in seeing how strengths and weaknesses align with opportunities and threats 3) provides simple overall direction 4)enables competitive comparisons using objective data 5) provides a strong starting point for further in-depth strategic planning. Weaknesses: 1) often results in a long list of items, too many to effectively manage 2) can over-simplify complex business processes 3) possible confusion between strengths and weaknesses, and these can change over time 4) may prompt companies to build on strengths that are less relevant to changing markets 5) provides a static view without insight into the sources of strengths and weaknesses.

Which VC activities can competitors see? Which activities should NOT be outsourced? Why?

Can see PRIMARY Should not outsource SUPPORT b/c hard to imitate

Assess how the value chain perspective provides insight on sources of competitive advantage.

Competitive advantage arises when competitors are unable to easily imitate a successful company. Such barriers to entry and barriers to mobility are often created through actions that a company engages in which its competitors cannot observe. In the value chain the support activities and the efforts to coordinate activities across the company are usually unobservable.

Sources of Value Creation - Activities in 5 "locations"

Internally 1.what unique internal activities make you distinctive? Upstream 2. what unique suppliers are you working with? 3. what unique relationships have you created with suppliers? Downstream 4. what unique customers are you working with? 5. what unique relationships have you created with customers?

Internal/Company VC Dimensions

SUPPORT ACTIVITIES ("support" the primary activities) 1. Procurement 2. Research and Development 3. HR management 4. Legal, Finance, MIS PRIMARY ACTIVITIES 1. Inputs 2. Operations 3. Distribution 4. Marketing and Sales 5. Service (has biggest area for a reason)

Two types of Internal Analysis

SWOT: -what a company *is* -static snapshot ___________________________________________________________ Value Chain Analysis: -what a company *does* -dynamic view

Describe how value is created through a firm's internal sets of activities (value chain).

There are four ways to create value: 1) provide greater benefits for the same price 2) provide the same benefits for a lower price 3) provide greater benefits at an incremental price smaller than the gain in benefits 4) broadening access to benefits to a broader audience without sacrificing current customers. Value can be created for both customers downstream and suppliers upstream. Value is created through primary and support activities that companies engage in, and through the extent to which all these activities are internally consistent and well- coordinated.

Perform a value chain analysis.

There are three steps in conducting a value chain analysis: 1) identify value chain activities 2) evaluate the value characteristics and costs of these activities 3) identify activities that allow the company to capture greater value, and those where further improvements are desirable and possible.

Conducting VC analysis: Identify key-value chain activities

different from competitors' activities potential to create strategic differences include key activities in all departments/function that are: >significant portion of operating costs >different from how competitors might do something >at the core of addressing industry KSFs explode out important subsystems in micro detail (ex. advertising development process)

Executional Drivers

performance and cost dimensions of activities - involving people,systems, routines, culture, and coordination - and usually have a fairly important learning dimension to them -work force involvement -total quality management -plant layout -capacity utilization -routines and coordination -culture

Structural Drivers

performance and cost dimensions of activities that are derived from the strategic choices made about the underlying economic logic and structure of the business -scale and scope -experience curve -complexity of p/s -technology utilization -capacity density